New York has a very strong policy against self-settled trusts. A self-settled trust is one where the Grantor transfers assets to an irrevocable trust but remains one of the Trust’s beneficiaries. While these transfers are legal, New York believes that they are “void as against creditors”. As a result, if the Grantor remains a beneficiary of this type of Trust in New York, his assets are not protected against creditors.
Nevada, however, together with approximately 12 other states, permits these types of trusts and protects the assets against creditors. As a result, theoretically, if the Trust is situated in Nevada, you can transfer assets to this trust, remain a beneficiary and protect your assets from law suits.
Benefits: The benefits of setting up a Trust in Nevada are numerous. First, there are no statutory exceptions for creditors who can access trust assets (divorcing spouses, child support creditors or pre-existing tort creditors). Second, there is only a 2 year statute of limitations, which is the waiting period during which a creditor is permitted to sue a trust. Lastly, Nevada does not force the Grantor to prepare a new affidavit of solvency every time he transfers an asset to the Trust.
Downsides: The downsides of setting up these types of Trusts are two fold. First, the cost. You will need a local attorney and a Nevada attorney to set these up. In addition, there are usually on-going fees for managing this type of a Trust. Second, there has been very little case law against these types of trusts. It is still unclear whether New York courts will accept the asset protection nature of Nevada trusts, even though they are done clearly against New York State policy.
Disclaimer: This article only offers general information. Each situation is unique. It is always helpful to talk to a specialized attorney, to figure out your various options and ramifications of actions. As every case has subtle differences, please do not use this article for legal advice. Only a signed engagement letter will create an attorney-client relationship.